Intraday market update: July 1, 2015
Learn how to trade breakout mode price action

Posted 7:25 a.m.

The Emini gapped up above yesterday’s high and created a two day island top. The bears want the breakout above the neckline of the 60 minute double bottom to fail. This would be a type of wedge bear flag. However, the dominant force working on the market is the sell climax.

After 7 consecutive bear bars on the daily chart, the odds are that today will close above its open and not create another bear bar. There have not been 7 consecutive bear bars on the daily chart in 7 years, so this is unsustainable behavior and therefore climactic. Even if there is a selloff for a couple of hours, there is an 80% chance that today will close above the open. Today will almost certainly be either a trading range day or a bull trend day, and close above the open.

Because of this, traders should be looking to buy strong bull breakouts and reversals up from any selloff below the open, especially after 11 a.m.

As I am writing, the Emini is in a tight trading range just above yesterday’s high and above the 60 minute moving average. It is in breakout mode and the breakout up or down will probably lead to a measured move. Because it is in a trading range and the Emini is in a 3 day trading range, the odds are that today will be a trading range day. However, there will probably be a swing up or down soon. Traders are waiting for either a strong buy or sell signal bar, or for a strong breakout up or down. At the moment, the Emini bulls and bears have about the same probability of a swing trade. However, if there is an early swing down, traders will look to buy a reversal back up to the open of the day after the bear swing ends.

My thoughts before the open: Learn how to trade breakout mode price action

The pullback from Monday’s strong bear trend day is continuing. Yesterday was an important day. Although it had a big bear body, it closed above the close of the prior day and still within the trading range. This means that the selloff might simply have been a sell vacuum test of the bottom of the trading range. Traders learning how to trade the markets must always remember that trading ranges always look like they are about to breakout, but until there is a breakout, there is no breakout. The key price is Friday’s low of 2086.25, which is the top of the gap.

As long as the bears can prevent a rally above that level, the high probability trading strategy is to sell rallies. If the bulls are able to get above the top of that gap down, the odds go back to favoring a new all-time high. Even if one does form, the breakout will probably fail because the monthly chart has an 80% chance of a test of its moving average, which is about 10% below the high.

The Emini has had 7 consecutive bear bodies on the daily chart. This is a once in 5 year event. There is about a 70% chance that today will close above its open, even if it has a big gap, which it probably will. The day trading tip is to pay attention to what the Emini is doing in the final hour or two. If the Emini is below the open, day traders will look for buy setups for a swing trade back above the open, which would create a bull body on the daily chart.

Whether the gap down closes or the market breaks below the trading range probably hinges on Greece over the next several days. The probabilities are about 50% for both. The bulls want a rally back above Friday’s low. If there is a gap up in the next several days, it would create an island bottom candlestick pattern with Monday’s gap down. Island tops and bottoms within trading ranges are common price action patterns and not particularly meaningful, but it would make the probability of a new high slightly more than 50%.

Because the Emini is near top bottom of the gap, the math is good for option traders. The bears see the rally as a double top bear flag with Monday’s high. They will buy SPY puts and put spreads up here and will exit above the gap with a loss. If there is a successful breakout below Monday’s low, they will look for a measured move down. They are risking less than 2 dollars in the SPY to make 4 dollars or more on a trade that has about a 50% probability.

Summary of today’s S&P Emini futures price action and what to expect tomorrow

The Emini gapped up and then traded down in a weak bear channel for over 4 hours. It then rallied into the close, but closed 1 tick below the open, creating another bear body on the daily chart.

Today is the 9th consecutive day on the daily chart with a bear body. This is a once in 10 years event. Because it is so unusual, it is unsustainable, and therefore overdone and climactic. It has more than discounted whatever bad news that might come over the next few days, like in Greece, and this means that it will probably rally no matter what happens in Greece. If there is a big gap down on Monday, it will be bought and the day will probably be a bull trend day.

Can the Emini get 10 or 20 consecutive bear bars on the daily chart? No. Well, anything can happen, but extremely rare things are extremely rare because they virtually never happen. This is one of those situations. The odds are that the Emini will trade up for several days, whether or not it has a huge, brief selloff on any news.

The bulls need to get above Friday’s low and close the gap. The bears need to prevent this. Since the next few days are likely to rally, the odds are that the gap will be tested. At the moment, it is a 50-50 bet. If the bull close it, the Emini will probably test the all-time high. If the bulls cannot close it in the next few days, they will probably then get a breakout below Monday’s low and a swing down on the daily chart.

Friday is a holiday so tomorrow is the last day of the week. So far, the weekly moving average led to a reversal up of Monday’s selloff, but the candlestick pattern can change by the close of the week tomorrow. Right now, it is bullish. However, the weekly chart is still in a 6 month tight trading range and in breakout mode.

Best Forex trading strategies

The overnight sessions were mostly quiet, but the dollar was relatively strong. The strong reversal up on the 5 minute candlestick chart of the EURUSD from Monday has pulled back to more than 50%. The rally was a Spike and Channel bull trend, and the pullback is close to testing the beginning of the channel at around 1.1050. Since the pullback is so steep, the EURUSD will probably have to go sideways and form a base if it will test back up to the middle or top of the channel. It is near support and will probably begin to create that base, which means it will probably enter a trading range today. Trading range trading can create difficult Forex trading for beginners because day traders have to make many quick decisions.

Traders learning how to trade the markets should look at the EURGBP. After a very strong rally last night, it has had a deep pullback. The odds favor a bounce early this morning.

The USDJPY rallied all night on the 5 minute chart, but the trend has become parabolic. Traders learning how to trade the markets should look at the daily chart because they will see a bull flag. There was a double bottom that had a bear breakout on Monday. It is now reversing back up. A failed double bottom is a 3 push pattern and therefore a type of wedge. Since the candle stick pattern is a bull flag, this creates a wedge bull flag. The 5 minute chart broke out of a triangle late in a bull trend. This is probably the final bull flag before a pullback into the triangle. However, the 2 day rally was strong enough so that the odds are that any reversal down will probably be bought. There should be bulls around a 50% pullback to the 122.50 area, if it falls that far.

The 5 minute chart of the AUDUSD fell strongly over the past hour . However, it did so in consecutive sell climaxes and it probably will enter a small trading range. The selling was strong enough so that online day traders will look to sell rallies.

The USDCAD has rallied for 2 days and over the past 2 weeks, but the rally is weakening and it might evolve into a trading range today. Traders will look to buy pullbacks. Since it is so overbought, they will also be ready to sell a reversal down, like a wedge top, if one triggers.

See the weekly update for a discussion of the price action on the weekly candlestick chart and for what to expect going into next week.

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When I mention time, it is USA Pacific Standard Time (the Emini day session opens at 6:30 am PST, and closes at 1:15 pm PST). You can read background information on the intraday market reports on the Intraday Market Update page.

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